Category: Commentary

Professor John Adams, retired, responded to my query on who benefits from the trillions of dollars in public spending sought by President Joe Biden.

John asks the question – how do we know who benefits from higher education as currently delivered?

His insights on the costs and benefits of such education can be read here.

Here is a letter I have sent to our state senators and state representatives on a stakeholder approach to law enforcement under our Principles for Government.

The concept is not new – it was launched by Sir Robert Peel in 1829 when he set up the first modern police force – the London “Bobbies.

In his address to the American people earlier this week, President Joe Biden added to his spending proposals.  He wants the U.S. government to spend some $6 trillion it doesn’t have to take better care of us folks.

Under modern monetary theory, not having ready money in hand to spend on us is not a problem for President Biden.  He can just order it up from the Treasury and the Federal Reserve System and dump the money into the economy, seemingly free of charge.

Some call this “helicopter money,” just dumped down on the washed and unwashed alike.

Biden and the modern monetary theorists are not alone in promoting such public largess. Liquidity transfusions into real economies is the template for a new system of nationalized capitalism.  It’s all the rage in Europe, Japan and China, to name just a few open-pocket governments.

Perhaps we should ask that ancient practical question: Cui bono? – “Who benefits?”

Now, I want to go beneath the surface in thinking about this question.  Of course, those who get the cash benefit – renters, those needing health care, students, others with subsidized living expenses, workers on infrastructure projects, federal, state and local bureaucrats and in some intangible way, society – will benefit from increased public goods flowing from provision of such private goods.  We have no way of measuring, as an offset, any public “bads” that might also come with these gifts of money.

But once the money is spent by its recipients, where does it go?  Mostly, it seems to flow ultimately into financial markets.  Middle and lower income people will spend it on consumption.  That will send money to those they buy from.  Ultimately, the money floats up to the wealthy.  They don’t consume so much, so they put their money in assets, mostly financial assets.

The flow of liquidity into financial assets raises asset prices, day in and day out.  Cui bono?  Obviously, the owners of financial assets.  These are mostly the top 1% and 10% of society.

So, the result of helicopter money is to make the rich richer in the short and long runs and the not-so-rich a little better off in the short-run.

Consider the growth in global liquidity:

Consider the result of liquidity creation on the purchasing power of the U.S. dollar:

Consider the stasis of average American incomes for the last 50 years:

Consider the shift in income towards the wealthy:

Consider the growth in the Dow Jones and the S&P 500:

Now, here are some news stories on what happens when financial assets appreciate:

Venture funds bask in blockbuster profits.  Sutter Hill made a $190 million investment in Snowflake Inc.  Last month, it distributed $12 billion in profit from that investment.  Sequoia Capital invested $235 million in Airbnb, which is now worth $14 billion.

With companies using SPACs or special purpose acquisition companies to issue stock to the public, The Economist reported that about half of recent SPACS are losing money.  Nevertheless, the 50 firms studied collectively report some $1 billion of gross operating profits. They forecast their profits to rise to $15 billion by 2023.  Five new electric vehicle companies, which were ushered into public markets in 2020, expect to go from no revenue to $10 billion in revenue in five years.  And people invest in these projections.  The cost of money is so low, why not, especially if you are a billionaire?  What else are you going to do with it, buy another mansion?

Four executives who ran GameStop in the most recent stock market bubble are leaving the company with stock worth $290 million at market price.

Market prices for all assets are on a tear-up!  And who buys assets to push prices up even more? Those who already own assets.

On April 27^th, Microsoft won from buyers of its shares a market capitalization of $1.97 trillion. Good for those who owned those shares, but what about you and me?

As I asked above: Cui bono?

As all Americans know, our country is not in a good place. The world knows this too. What may have happened here is both unique to the U.S. and a repeat of previous social and cultural “distempers” at other times and in other places.

It feels as if we are in the midst of something more religious than secular, more emotional than rational; something like a seeking of salvation, proving our goodness to a higher power.

The intersection anywhere of principles with culture, politics and the economy is very much the center of concern for the Caux Round Table.

There is a very American tradition of religious awakenings. One preceded our seeking independence from Great Britain. Another came before our Civil War.

In this commentary, I have attempted to fill in the blanks of an explanation of our current crisis as something similar, some seeking of both individual and mass redemption when confronting the coronavirus pandemic.

I would be particularly interested in learning your perspective on the widespread distemper among Americans.

A curious failure in football – European style – teaches a lesson on the importance of stakeholders. Several teams came up with a scheme to create a new league.

The proposed league was to include 12 clubs. But when the effort was launched, fan reaction was very negative. So, six of the clubs immediately pulled out and the initiative collapsed.

To help finance the organizing expenses of the new league, JPMorgan had pledged $4 billion in financing. The loan was secured with future television rights payments made to the founding clubs.

Last week, the bank apologized, saying its decision to provide such financing had been a “misjudgment.”

The proposed league, formed to rival the Union of European Football Associations, the governing body of European soccer, would provide automatic participation in the annual championship competitions for its 12 members.

Those whose patronage will provide cash flow to companies are very important stakeholders whose views on the quality of products and services very much count.

If discourse is to be a moral foundation for political decision-making, it should have open-architecture and be inclusive and diverse.

Free speech seems necessary to enable and make fluid the decentralized, open-architecture dynamics of democratic capitalism. With power widely dispersed in such systems, its mobilization on any scale for collective achievement requires communication, trust building and collaboration among different holders of power. Free speech maximizes the range of possible collaborations in such systems. Censorship and restriction of speech would suboptimize outcomes.

I want to share with you a recent commentary by Professor Jonathan Zimmerman, which appeared in the Wall Street Journal, on the importance of free speech and the current efforts in the U.S. to throttle diversity in community conversations.

Earlier this month, The Economist published a commentary on “The Political CEO“, referring to the U.S. and recent public advocacy by CEOs.

The observations of the commentary are quite similar to those I sent you last week. It’s the first time the Caux Round Table’s thinking has been aligned with similar thinking of The Economist.

For the Caux Round Table (CRT), the “holy grail” of how best to run private enterprises as moral capitalism is including intangible assets – social and human – into the value of the enterprise.  The purpose of the firm, then, expands from earning short-term profits to increasing firm asset appreciation and avoiding the loss of assets.

As the firm seeks to optimize the value of its assets – financial, social, human and in ways not yet fully understood – it acts in a socially responsible fashion.

A major hurdle to overcome is accounting conventions, which do not provide means and methods for pricing social and human capitals and for recognizing them as assets on a balance sheet.

In 2019, an investor advisory committee on human capital made a recommendation to the U.S. Securities and Exchange Commission (SEC) on the new importance of intangible capitals to the asset value of companies as follows:

-Today’s companies are increasingly dependent on their workforces as a source of value creation.  Indeed, for many of the most dynamic companies, human capital is their primary source of value.  As the U.S. transitions from being an economy based almost entirely on industrial production to one that is becoming increasingly based on technology and services, it becomes more and more relevant for our corporate disclosure system to evolve to include disclosure regarding intangible assets, such as intellectual property and human capital. Human capital is increasingly conceptualized as an investable asset.  Modernizing the commission’s framework for corporate reporting generally should reflect these facts, subject to the standard of materiality.

-More specifically, as depicted in figure 1, a 2015 study of the components of S&P market value data found that the implied intangible asset value of the S&P 500 grew to an average 84% by 2015 from the 1970s, when it was less than 20%.  The shift is ongoing and reflects a growth in the importance  of intangibles, such as human capital, of four percentage points over ten years.

In August 2020, the SEC ”modernized” its rule on the disclosure of human capital.  The new regulation requires disclosure of a firm’s human capital resources, including in such description of human capital resources, any human capital measures or objectives that management focuses on in managing the business to the extent such disclosures would be material to an understanding of the firm’s business taken as a whole.

The step towards recognizing the CRT’s focus on intangible assets taken by this decision of the SEC to require a description of a firm’s human capital resources is that it effectively denominates human capital as an “asset” worthy of recognition and appraisal in monetary units by a firm on its balance sheet.

The relevant section of the SEC’s public release giving notice of this new requirement can be found here.

In the current cultural turmoil in the U.S., Big Tech companies such as Facebook, Twitter, Amazon and Google take political positions by censoring opinion and speakers they don’t like. Many advocates of good causes press companies to sway public opinion or adopt new norms with respect to remediation of global warming or compensation for past discrimination based on race.

The issue of when corporate social responsibility would encourage political engagement by companies is most relevant to democracies where rights of free speech, the rule of law and free markets are the reality. In one party or other authoritarian states where control of private lives by the government is the norm, companies do as they are told, not as they might like. In such states, what can’t be helped must be endured, as the recent experience of Alibaba and Ant Financial in China has demonstrated.

The Caux Round Table, many years ago now, made a distinction between corporate social responsibility, on the one hand, and the responsibilities of governments and civil society, on the other. The ethics of competency and “sphere sovereignty” constrain the power of companies to dictate politics, as they see fit to do.

But there currently is little discussion of what the ethics of companies, especially publicly held corporations, should be when the responsibility of companies, as citizens, is under discussion and open to critique.

As James Madison reminded us: “If we were angels, there would be no need for government.” Corporate social responsibility, likewise, cannot presume that companies are always on the side of the angels. Some degree of circumspection is therefore wise.

In a related essay ascribed to either Madison or Alexander Hamilton, the point was made that “as there is a degree of depravity in humanity, which requires a certain degree of circumspection and distrust, so there are other qualities in human nature which justify a certain portion of esteem and confidence.” When companies and their executives presume to lecture and admonish citizens as to what is right and what is wrong, should their recommendations be received with mistrust or with esteem and confidence?

A commentary, which you may read here, proposes some preliminary interpretations of the premises of moral capitalism for the social responsibilities of companies in democratic discourse.

I welcome your comments on what should be expected from enterprise in the evolution of culture and in the power struggles of our political factions for the right to legislate their preferences.